Annex C: Forestry Fee Calculations

In an open freely competitive non-interventionist commercial market, prices are determined through the establishment of an equilibrium, arbitraged through the transactions of many buyers and sellers. Most markets have some form of regulatory mechanisms to ensure the "level playing field" to needed to bring this about. Monopolies, which can legitimately exist, tend to attract a greater degree of regulation. Public utilities, such as electric power or water providers, generally have administratively controlled mechanisms to establish their pricing levels. Where the nation's forests are totally managed through state managers, there may exist a number of reasons to also employ "administratively" determined "reserve prices" in selling such resources.

Amongst the information needed by entrepreneurs to develop their forest sector strategies is:

a reasonable accurate estimate of the quantities and quality of raw materials that will be sold in a given year

the number and size of competing buyers

the geographic distribution of the volumes that will be sold

In a competitive market, entrepreneurs accept that there are risks and are only attracted to those commercial sectors that demonstrate a potential profitability commensurate with their perceived risks.

Where the state is the sole seller of roundwood entrepreneurs recognise the potential of states to intervene in domestic "markets" to meet political, industrial, employment, taxation, conservation and international treaty objectives. A demonstrable level of instability is often present in sectors manifesting a combination of, i) cautious operators (investors) trying to minimise their risk within "government managed" "markets" and ii) opportunistic governments trying to maximise their longevity.

Ordinarily, the ministry responsible for forests, as managers of the state’s (public’s) forests, authorises the sale of forest stands to timber developers, (operators, loggers, contractors, etc.) - for a fee. [In North America, forestry fees have been called "stumpage" - after the fact that they were once determined by merely counting the "stumps" remaining after timber harvesting. In Europe and North America, these fees have also been called a "royalty" reflecting the fact that, at one time they were a payment to the king in return for being granted permission to harvest.]

The fee is frequently related to – and often equal to – an "economic surplus" or "residual value" accruing to the transformation process (tree to log to sawnwood, etc). The surplus is generally determined by the following formula:

Fees for the use or harvest of any forest product - wood or non-wood - can be calculated on similar principles.

Royalty collections usually become part of general revenues and are managed for the state by their financial ministries. They are generally not "earmarked" for specific forestry purposes - as governments tend to reserve the right and flexibility to redirect budget allocations as they see fit. Social, political and economic priorities will determine the ultimate redistribution of all government revenue collections - and the amount that eventually returns to the Ministry of Forests. In Morocco, however, the use of the comptes spécial has been very effective in providing a reasonable stable budget to the MCEF.

Redistribution of revenues arising from the inherent economic values (economic rents) present in forest resources can take many forms. Fundamentally, an efficient and equitable approach to collecting and redistributing forestry fees recognises that many stakeholders may have legitimate claims to a share of the benefits of the republic’s forest resources – and should therefore be funded out of collected surpluses. In Morocco the retention of forest revenues by the communes to whom the forests are tributary is basically inequitable and can be demonstrated to violate this principle.

Stumpage adjustments

Where administratively determined reserve prices are used, there is a justification to periodically (monthly or quarterly) adjust them to reflect changes in the cost of many input charges (fuel, labour, etc.) that change over time. The goal of such adjustments is twofold. It provides a stabilising mechanism within a sector where prices are known to change frequently. It maintains a reasonable distribution of the cost and benefits generated by the sector.

Forest sector operators - public and private - are routinely subject to changing prices. Commodity selling prices, including roundwood and sawnwood, tend to change frequently - many times due to influences beyond national borders. For instance, partial or complete ban on logging in a country (e.g. Thailand, China) can drive both local and international prices upwards. Removal of log export restrictions clearly increases the volumes available in international markets and can dramatically drive prices downward.

Additionally, a change in selling price of a commodity sold in large volumes can affect the price of many other complementary, substitute and competing goods. An increase in the price of newsprint, for instance, can affect the price of low grade logs that might otherwise have been used for packing crate construction but will now be sold as pulpwood.

Because forestry activities tend to be labour and energy intensive, operations input prices are also subject to unexpected incremental change (e.g. oil price shocks, labour unionisation and transportation costs). The impact here can be as significant as for selling price changes.

To summarise, the consequence of changing input and end-product selling prices can include:

in cases where end product selling prices fall

i) above normal state revenues at the cost of producers / sellers

ii) below "normal" profits for producers / sellers

in cases where end product selling prices fall

i) below normal state revenues in favour of producers / sellers

ii) above "normal" profits for producers / sellers.

Forestry fee adjustment mechanisms function by maintaining the difference between the reserve price and the product selling price. This is particularly necessary for long term contracts - during which both types of price changes are inevitable. This can protect both the owner (the state) and the buyer (operator/exploiter) from.

If fuel expenses increase excessively by the time the harvest is completed and the forestry fee payments are, the operator may experience business failure which is neither in his interests nor that of the state. Similarly, if a new technology is applied and fuel prices are much reduced, the "reserve price" no longer reflects the operator's real costs - which would now have dropped considerably. Such an operator would be experiencing "above normal which" - which the Ministry's stumpage calculation system should be designed to capture for the state. Recalculating the "reserve price" returns the operator to the profit levels his bidding had originally anticipated.

The above system is not without its inherent complexity and controversy. However, it is an inherently fair system that is in place in several jurisdictions where the state is the single or very dominant seller of forest products. Unless Morocco introduces such a system of one that in many respects produces the same results, it can not know if it is maximising its forest revenues.